View from the Ground Level - Practical Issues re: PPP Implementation: A Conversation with Banking Attorneys Around the Country

Financial Services & E-Commerce Teleforum

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This teleforum will be a collaborative discussion for attorneys who represent financial institutions, in particular those organizations that are participating in paycheck protection program created by the CARES Act.  


Jennifer R. McCain, Shareholder, Maynard Cooper Gale

Christian Otteson, Partner, Shapiro Bieging Barber Otteson

Jonathan Hightower, Partner, Fenimore, Kay, Harrison & Ford, LLP

C. Wallace Dewitt, Adjunct Scholar, Center for Monetary and Financial Alternatives 


Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of Practice Group Teleforum calls, become a Federalist Society member today at



Micah Wallen:  Welcome to The Federalist Society's Teleforum Conference Call. This afternoon's topic is, "A View from the Ground Level - Practical Issues regarding PPP Implementation: A Conversation with Banking Attorneys Around the Country." My name is Micah Wallen, and I'm the Assistant Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today's call.


      And today, we are happy to have with us Jenny McCain, who is a Shareholder for Maynard Cooper Gale and a Co-Chair of banking and their financial institution's practice group. We also have Christian Otteson, who is a Partner at SBBO. We also have Jonathan Hightower, who is a Partner at Fenimore, Kay, Harrison & Ford. And we also have with us Wallace Dewitt, who is Senior Counsel at Allen & Overy.


After our speakers give their opening remarks, we will then go to an audience Q&A. Thank you all for sharing with us today, and, Wallace, the floor is yours.


C. Wallace Dewitt:  Well, thank you very much for those kind introductions, Micah. This is Wallace Dewitt of the Washington D.C. office of Allen & Overy, currently operating from an undisclosed location in Alexandria, Virginia, like, I think, a lot of our colleagues here.


      I cover a mix of banking law and securities regulatory issues primarily for our international clients, but today, we're going to be talking about PPP. That's not Profits for Partner, for all you firm lawyers in the audience, although I'm sure that's on a lot of our minds right now. Rather, we have three banking experts assembled to discuss the Paycheck Protection Program that launched on April 3, just one week after its enactment by Congress as part of the CARES Act.


      I suspect that many of those in the audience today, particularly those who work on the Hill, are intimately familiar with the PPP provisions of the CARES Act. But for those who need a brief refresher, the PPP constitutes an expansion of the existing small business loan programs, subject to guarantee by the Small Business Administration under its enabling act.


      So Title I of Congress's recent CARES Act expands relief options available to certain U.S. businesses through the SBA, including the creation of a new class of lending, namely Paycheck Protection Loans.


      The program is administered by the SBA, although the Treasury Department has been tasked with issuing various guidance documents and fact sheets, etc., some of which I'm sure will come up over the course of the discussion today.


      In terms of the size and percentage of the principal amount that may be guaranteed by the SBA, those have both been increased by the CARES Act. Loan size is limited to the lesser of $10 million and 250 percent of the borrower's average monthly payroll cost plus any economic injury disaster loan made since late January.


      The terms of these loans are naturally quite favorable to small businesses. They include a two-year maturity, one percent interest rate, non-recourse to principals of the borrower except to the extent the proceeds are used for impermissible purposes, another important topic that'll come up today.


      There's no personal guarantee or collateral requirements, but the availability of alternative credit will be considered as part of the borrower's certifications. And finally, there's no guarantee or annual fees otherwise associated with Section 7(a) loans under the SBA's act.


      The loans are subject, and this is an important provision, the loans are subject to loan forgiveness by the SBA, but this forgiveness provision is tied to the policy aim of supporting employment and wage levels. So as a result, the loans are intended to cover the cost of maintaining payroll costs, rent and mortgage expenses, utilities, etc., for the eight-week period following loan funding.


      As a side bar there, proceeds can be used after the passage of that eight weeks but wouldn't be eligible for forgiveness per statute.


      SBA guidance provides that at least 75 percent of loans proceeds must be used for payroll costs, and no more than 25 percent of the forgiven amount can include non-payroll costs. The total amount of forgiveness is reduced in the event that certain fulltime equivalent FTE employee and wage metrics go down. And forgiven amounts will not be taxable for U.S. federal tax purposes come just about this time next year.


      Borrower eligibility, this generally covers businesses that are organized for profit with a place of business in the United States operating primarily within the United State or making a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor. The key size restriction is entities with no more than 500 employees or the applicable SBA employee-based size standard if that's higher. And then finally, a company that was on operation or it had either employees to whom it was paying wages and payroll taxes or an independent contractor on February 15.


      Other eligible borrowers include certain small business concerns defined by the Small Business Act, sole proprietorships, independent contractors, certain nonprofits. There's also a carve out for certain hospitality businesses that may be eligible if they have no more than 500 employees per physical location.


      All existing SBA lenders may participate in the program. And interestingly, the loans will have a zero percent risk weight for banks risk-based capital requirements per the NCUA and also all the federal banking agencies.


      That's in a nutshell what a black letter description of what the statute says and some of the regulations that have been issued so far. I'd like to open up discussion with our three panelists who are on the front lines of this issue right now, down in the trenches helping get these loans organized for lenders and borrowers.


      So I'd like to start with Jenny McCain. So from the beginning, there's been a lot of uncertainty about whether banks could participate in the PPP program as borrowers. I'd like to start by asking how did that get resolved, one way or the other? And on a related note, were small businesses owned by bank directors and other insiders eligible for PPP loans? 


Jennifer R. McCain:  Wallace, thank you. Thanks for that question, and thanks for your very-well broad, I have to tell you, summary of what the PPP program is. I, as Wallace said, I'm Jenny McCain, and I am coming to you from Birmingham, Alabama.


      Actually, one of the stronger banking meccas in the country over the years, which surprises a lot of folks. My practice focuses on regional banks, regional five banks, but also a lot of community banks, which we've heard a lot about with this program.


      When this rolled out, there was the government and Treasury decided to use the banks on the forefront of getting relief out to the small businesses. And instead of -- they did the checks out to individuals for relief, and they used the banks and said this is how we want to get funding out to keep people employed.


      But one of the challenges initially was we're putting out something very big and very fast. And as we all know, implementing something is where it gets very tricky because there's always a lot more to consider than what you might think on first blush.


      So with the banks being the lenders of choice and the SBA becoming the, in a sense, the regulator of choice, and in the background you have the federal regulators and the state regulators, banking regulators. You had a rather interesting mix to consider.


      The banks first thought about their customers in deciding -- and their small business customers and their other customers. And they also started thinking about themselves, would we qualify for these loans? And in the loans, you had two certifications that had to be made.


And the first certification, as things started rolling out, was that -- and it was a very interesting wording. It said that the pandemic [inaudible 9:23] existing circumstances made [inaudible 9:28] of the business. And then the second certification essentially said that the information providing for the [inaudible 9:38] and the calculation and the -- and it was -- and the first thing you started thinking about was how did you determine this information? And could the lenders rely on it?


      For the eligibility criteria, the banks, honest, from day one, everyone was scrambling to find out what information did we have to determine who was eligible. We just had the CARES Act. We didn’t have any information about any of the details on it to rely on. And all of us were trying to find who we could talk to at Treasury, what we could find circumstantially or from anecdotes as to who might be pulled into it.


We were all getting conflicting information on that, and we were all waiting for the interim rules because the floodgates were going to open on the 3rd of April. And the trade associations and others were hearing one thing, and they were saying okay, it looks like maybe the banks are going to be allowed to participate.


And then you started thinking through well, is that going to be a conflict if you are a lender and this is supposed to be intended for restaurants and for the groups that are hit the hardest, and here you are being the ones to be lending the money and you're going to be essentially being seen as perhaps taking money, the mana, or the food out of their hands and deciding who gets the water. You're taking a drink out of the barrel. Is that a problem?


So we were sorting through all of that with our clients thinking that perhaps the banks were going to be allowed to participate. And you're deemed an essential business in this, so you're working through all of this at kind of a break match speed and calling -- I was on calls at 7 am or 7:30 in the morning with the various subtle regulators, the FDSC, the feds, the OCC, Office of the Comptroller of Currency, and with the state regulators in saying how would you view this, even though they're not the SBA or Treasury putting this together but thinking if you're regulating the banks, then you can be criticizing them if they take advantage of this when essentially they're being allowed to stay open with some modifications while others are being forced to close.


So we're working through this on some long days and really wanting guidance. And it seemed to us, why can't we just get a clear answer? But every indication we're getting from people are saying oh, I know somebody at Treasury, or I know somebody at the SBA, and they're talking to your local person and all the bankers were all on various phone calls. I think Jonathan and I talked about this, and we're -- all the banking lawyers, various banking lawyers across the country are getting on calls saying, "I heard this, " and "I heard that." And that's what was going on throughout the week.


And then what was just really interesting, the very next day, on Friday, the portal's supposed to be opening up where you can start submitting these applications and finally, kid you not, the Interim Final Rule, which is a really interesting term of art that happened after [inaudible 12:53] that says basically “a Final Rule is out that is not what's going to ultimately be there but be evolving but it's going to be in place for now” came out around 6:00 pm, the night before the SBA -- the PPP goes -- the applications will be accepted by the Small Business Administration comes out.


And it says that ineligibility -- there's certain parts of the existing SBA regulations apply. They carve our certain nonprofits, but they say that banks and finance companies and certain other companies are not eligible. So it was decided that and determined that banks could not apply but at the eleventh hour. So that was a very interesting thing.


But then on a related note, you had director-controlled businesses and a lot of these directors, of course, you want your bank director to be doing business with you, but there were conflict rules on that that were in place. And that applied to other SBA loans and [inaudible 14:07]. So our bet, do those apply and [inaudible 14:12]. And there were words that I had other folks put, someone who walked down the hall to -- on someone very senior at Treasury, and they said, "It is allowed for a bank director or other insider, they will be allowed to lend to a business controlled by their own director. That won't be a problem. But if these existing regulations were deemed to apply, they couldn't do it."


And so there was all this back and forth. After the third, kind of going into the second week, and all of us were trying to figure out did those rules really apply to the PPP program. And it was -- I can't tell you how many phone calls I was on that week where we were just trying to ferret this out. And it was -- the accounting firms were weighing in on it. Law firms were putting out guidance. We had the banks, really wanted to do the right thing but they really wanted the right thing to be able to make the loan to their own directors and their own 10 percent or more shareholders businesses.


And a lot of those shareholders and businesses didn't necessarily want to be giving their financial statements to other banks. But it was pretty hair raising. And ultimately, what came out, about the time the money was running out was a FAQ that said -- despite the fact that the guidelines at one point was like you could and then like you couldn't, it came out a ruling saying that despite -- an FAQ came out and said that we are now deciding and kind of that you can do it but only because we're saying now that you can make a loan to a director-controlled business. But if we hadn't issued this FAQ, you otherwise would not be able to do it.


And so this is just a few of the things that have been going on after the past couple of weeks on the eligible or ineligible businesses. But it has been just a rush of trying to get all the breadcrumbs or trying to make sense of very unclear items and on very important matters.


And so I think that's just one piece, and you would have 15 or 20 clients at the same time trying to figure out what to do with very anxious people along with very anxious customers, almost in real time and simultaneously trying to get answers.


So I'll throw it back to you, Wallace, to perhaps talk to Jonathan and others to see what they saw in maybe different areas on the program.


C. Wallace Dewitt:  Well, thank you for that, Jenny. It's not every day that the practice of small business loans and banking law is as white-knuckled edge of your seat as it has been this past month or two. And I think your remarks really do bring that home.


      Turning to you, Jonathan, and Jenny alluded to this at some point in her remarks as well, but my understanding is that it was pretty terribly difficult to understand the rules of the PPP program on the condensed telescoped timeframe that everybody's been dealing with here.


      Beyond the published statutory text and the rules and the interim rules of the agencies, my understanding is there's a completely different set of rules in place from a systems and operations perspective. How did that operational and systems perspective affect the process as it unfolded from your role?


Jonathan Hightower:  Well, thank you very much, Wallace. It affected it dramatically and really in ways that were difficult for those of us attempting to advise banks, difficult for us to deal with.


      Just stepping back just a little bit and maybe starting to savor some of the frustration and pain that we went through in terms of being able to start to write a book one day. You think back to, I believe it was April 1, Secretary Mnuchin gave a press conference and gave a little bit more detail about the program.


      I think at that point, that may have been when he announced that it was a one percent yield, which has been very controversial in the banking industry. Everyone had read the CARES Act to assume that there would be a 4 percent yield. But he was going through his press conference, which I was at my desk watching and just about everyone in our firm was also watching it.


And we use Microsoft Teams here, and at the time that Secretary Mnuchin announced that on Friday, borrowers would be able to go into their banks and have their loans funded on the same day, I was very happy that Microsoft Teams has enhanced security features because if anyone had ever showed the transcript of our chat to our mothers, they would've been very ashamed of us for some of the things that we were saying because we knew at that point, there was no way that banks were going to be in a position to fund these loans on day one of the program. And yet, the public expectation had just been set.


      So going into that first Friday, April 3, where the program kicked off, we had all worked very hard as banking lawyers to start to understand the program. Granted, most of us in the regulatory field are not SBA lawyers. SBA programs have existed for a long time. Many of our clients make SBA loans, but certainly not all of them. And they're usually not something that we regulatory lawyers really get involved with other than just to know that they're there and have the general shape of it.


      But certainly, as it comes to originating these loans, we don't touch those on a regular basis, so we were really starting to get into a new world. I told a few people jokingly on that Friday, well, two weeks ago, I couldn't spell SBA. So we're all learning at the same time.


      As that Friday unfolded, and it was really interesting. I had the pleasure of serving as outside general counsel to the Georgia Banker Association, and it's something I do on a volunteer basis. But it's really rewarding in that I get to interact with a lot of bankers through that. And so I had people calling all day just, "Hey, what have you heard? What are you seeing?"


      Many banks were not able to access the ETRAN system that SBA uses for people to submit applications and get loan numbers and approvals for these loans. But as the day unfolded, some of the bank clients that we had that were previously SBA preferred lenders were able to get loans through the system and start to get loan numbers. And some of them started to get loan authorization.


      Now, from what I understand, for folks who had made SBA loans historically, that's a very normal part of the process. You get a loan authorization. It tells you the general shape of the terms that have been approved. It gives you instructions for documenting the loan and dispersing the funds. Again, a very normal piece of them.


      Well, it turned out that because this program was stood up so quickly -- and again, it was stood up quickly for all the right reasons, as we all know. The SBA just did not have time to adjust that system to fit this program. So a lot of these -- in fact, all of these authorizations that were being provided to the folks who could see them -- and by the way, if you were servicing approval, had not come through, which is a different thing apparently from your origination approval, you couldn't even access the screen in ETRAN to see the authorization.


      So some of the preferred lenders started to get these authorizations back, and they started to email them to us and say, "Well, what does this mean?" These authorizations contained a lot of, just, holdover terms from a normal SBA 7(a) loan that would not apply to this program. Terms like, "Dictating a note form," which that in and of itself was not problematic, but it gave some repayment terms that just didn't fit with the program at all. And it gave them in fairly direct and certain terms.


      So you have these banks that have received these approvals. They've read the CARES Act. They've read the interim final rule that came out the night before the program. They're ready to serve their customers, but then they get this authorization. They say, "My goodness. I can't disperse funds because I don't -- it's just not clear to me how we do that."


      So this issue continued on Saturday, the 4th, to the point where the Georgia Bankers Association and I just felt like we needed to put out some information for bankers to understand this and know that there was some risk in dispersing funds when this wasn't clear how banks were to close these. So we hopped on a Zoom chat -- or a Zoom webinar, I suppose, which is, as you know, very in vogue these days, and we pulled up one of the sample authorizations and just shared it with everyone on the screen, highlighting some of the problematic language.


      At this point, I don't know if that was the worst thing we've ever done or the best. But it certainly made people aware of the issue, and apparently, based on the statistics we get out of Zoom, the link to that program was forwarded all over the place. And in fact, I ended up, out of the blue, getting a call from the New York Times a couple days later saying, "Oh, walk us through this problem that you identified on this webinar." So that was a good reminder to maybe have people register to view your Zoom webinars if you don't want the media to get it.


      But in any event, that issue continued, and banks were not very comfortable funding these loans for a full week after that. At the next Friday, the 10th, we were on calls with people trying to reconcile these systems requirements with the shape of the program, feeling like they really needed to get funds in borrower hands. That was certainly the public expectation and demand. So we had some people proceeding on that Friday to start to close these loans, even in the absence of guidance on how to do it.


      Excuse me. Well, of course, after we lead those people through that that Friday night, and FAQ came out saying you don't have to have an authorization. You can, basically, you can ignore that and proceed to fund the loans with your own loan documents or using the SBA provided forms -- excuse me.


      So we worked all day that next Saturday to fix that problem. And ironically enough, it was only today that an interim final rule was produced that really fully resolved that issue saying that you can use your own loan documents, and you can ignore the authorization. No authorization is needed to close these loans.


So it has been a battle again. And it's crazy to think that banks blew through the first round of this funding, really without having clear guidance on how to fund these loans and even still, we sit here without clear guidance, in detail anyway, at how forgiveness is going to work.


      So again, the operation details of all this have been quite an issue. So, Wallace, I'll throw it back to you to continue from there.


C. Wallace Dewitt:  Well, thanks very much, Jonathan. And following on to my reaction to Jenny's remarks, it's not every day that a banking lawyer gets called up by the newspaper of record in our fair country. That's pretty impressive there.


      So turning finally to Christian, I understand that you've been fielding a lot of questions as to how the lending limit rules apply to PPP loans and also how the fed's PPP liquidity line is being viewed in terms of bank's non-core funding dependence ratios. Care to comment on these issues?


Christian Otteson:  Yes. Thank you. Thanks for having me. So I think in the spirit of Jonathan's experience, we also have a number of clients, some of which are in the business of making SBA loans. It's a core vertical for them, and some who don't, but wanted to make it one in a matter of hours, really, or certainly, just a few days.


      Those who were equipped at least had a familiarity with the SBA loan program, dedicated all of their resources to originating these applications and getting approvals. Many of the banks, especially in the first few days that you probably have read, were kind of dominating the origination production were small community banks. They have limited resources, so they allocated those resources to the origination function and said we'll come back to how we actually administer this and document these loans.


      There was also a pause in the action where primarily the CEOs and CFOs asked the question, "How does this fit into our asset liability management program?" So as you probably know, banks are -- the quality of the bank and its regulatory profiles based on the camel system. So there are various components and banks are examined on a regular basis.


      And two of the critical components, the C and the L, are capital and liquidity. So there was a pause in the action, and they stopped and asked, "Okay. We're generating an asset, and every time we increase the balance sheet, either organically or acquiring assets, we have to ask ourselves, how are we going to capitalize this and how are we going to fund it?"


      So the regulators, as part of the process—and it's also been fluid and evolving and still is—did a couple of key things to helps with those two questions. one of them is the PPP lending facility through the feds. And another, that I'll get to in a second, is an interim final rule on the capital treatment of these loans.


      Those are two important constraints, and absent regulatory intervention, it could, at least partially, defeat the purpose of using banks to deploy these funds. So I would say most of our clients, but not all of them, are using the PPP lending facility. It is a little more expensive than some of their other wholesale funding sources like SLUB and even the discount window at the fed, which right now, we're at about 25 basis points.


      So briefly, banks can fund these loans by pledging them to the fed under this facility as collateral. The loan is non-recourse. It's a fixed rate, 35 basis points. The maturity tracks the maturity of the loans. So it's two years if they're not otherwise retired before that period. There's no limit on the extension amounts.


As these loans trade in the market, you've ruined your ability to pledge them because only the originator can pledge the loan. So it's a very, obviously, inexpensive, relatively clean way to fund these credits.


Another note, banks are judged on the liquidity side by the quality of the liquidity. With core funding, i.e. deposits and even better, non-interest-bearing deposits and the percentage of their makeup in their total funding structure—and there aren't really published rules on this but generally—is a banks source of funding, non-core funding, meaning non-deposits. It's a little more complicated but generally, non-deposits as a percentage of total assets starts creeping towards 20 percent, it raises eyebrows. The regulators sit up straight in their chairs, and then there's concern.


So one of the questions that's been raised is how this funding facility has been created to help provide the source of liquidity for banks to make these loans. Is it going to hurt us in terms of our liquidity profile? So there's no published guidance specifically on this issue, but I have discussed it with the federal banking regulators.


I probably received the most detailed feedback from the FTAC. And the general attitude is that the borrowing is short term in nature, and if the borrowers abide by the forgiveness rules, it should roll on and off the bank's balance sheet very quickly, even intra-quarter. So it shouldn't materially impact their liquidity profile, but the regulators are going to be very accommodating. Although, they did say it is a non-core funding source, and they're not issuing any special guidance, right now at least, to say anything to the contrary.


And they also noted that any hit to a bank's non-core funding, they think -- at least this is the FDA's fees up -- and then would be outweighed by the community reinvestment act contribution that occurs by making these loans.


So I would say generally, the attitude is very accommodating, as you might expect. We'll see how accommodating the regulators are, and oversight offices that are created to manage this program months from now, but at least right now, it's very accommodating.


On the capital side, as I mentioned, there's an interim final rule. It was issued on an inter-agency basis. So each of the federal bank regulators joined the rule that effectively neutralizes the capital impact of these loans.


So as law has said, the loans are assigned a zero risk waiting for risk based capital purposes, and to the extent the loans are pledged to the fed facility tied to this program, then it would have, really, no impact on the leverage ratio either. So banks are constrained both on the liquidity side and the capital side based on minimum leverage ratio expectations that they're subject to.


And this interim final rule, it neutralizes the impact of these assets by effectively eliminating them from the equation. So the CFOs and those who manage the asset liability programs can breathe a little easier.


      Another question we're getting is how does this impact our lending limit? The lending limit, as you may know, is established by the chartering authority of the bank. So for national banks, it's manages by the OCC and its regulations. And for state banks, it's a state law issue.


      The FDIC did wade into this, albeit, at a very high level noting that from their perspective, because the loans are guaranteed by a federal agency, albeit with some strings attached, that they should not count towards a bank's lending limit. But then they admonished banks to check their chartering authorities' regulations.


      I would say generally, the OCC's regulation and states that have mirrored that regulation, it should not be counted towards the lending limit because it's guaranteed by a federal agency. But I will say, not every state's lending limit statute or regulation mirrors the OCC. So it's an issue that the banks should at least spend a little bit of time checking to make sure that there's not some provision that would require that these count against the lending limit.


      Why is that relevant? I go back to my initial comments. Some of the heaviest participators in this program are small community banks that have a very small lending limit because it's based on the amount of capital that they have. So it's an important piece of the equation to incent banks to make these loans.


      And then I think last comment, another question we're getting is banks, they're subject to FDICIA audit requirements based on asset size. And one of the questions we're getting, especially with heavy participators who are in that 350 million or 400 million range in total assets and who are making 100-150 million in PPP loans, what is this -- does this mean if we cross the 500 million in assets threshold, we're going to be subject to FDICIA starting next year?


      If the answer to that were yes, that would be very problematic because it takes time and coordination with your auditor. Your auditor may not even be in a position, frankly, to satisfy the requirements of the regulation. So it's a question that's been coming up. But the way the rules are structured, FDICIA requirements are not triggered unless a bank is at 500 million in net total assets on the first day of their fiscal year.


      So again, because of how this program is structured, the loan should come on and roll of off the balance sheet even intra-quarter. And as long as that happens, and they don't just invest in fed funds or use up the proceeds to buy some other asset, they should be able to manage the FDICIA issue, so long as they're not at 500 million or greater on the first day of their fiscal year.


      So those are a flavor at least of the types of questions we're getting on more of the safety and soundness side of banking and the asset liability management side and how this program affects that.


C. Wallace Dewitt:  Well, thanks very much, Christian. That's a terrific overview of the safety and soundness questions. I think we're now 20 minutes from the hour, so I'd like to throw the floor open for Q&A. Micah can help open the line for that, and we'll see what we've got out there. If not, I've got a couple questions of my own that I might like to pose to our panelists as well. But let's just see, Micah, what might be out there.


Micah Wallen:  Absolutely. Let's go ahead and get that floor open for any audience questions. We'll now move to our first caller.


Caller 1:  Thank you. When these loans are used for the PPP, paying payroll and rent, and they're forgiven, will a 1099 be issued?


Jonathan Hightower:  So this is Jonathan. What I understand from the tax folks and the accountants is that this will be excluded from income. So I'm not exactly sure that that's a direct answer to your question about how it will be reported, but I think the ultimate tax consequence on the forgiveness is contrary to what I would've expected. It's not going to be includable in income.


I think the question on the other side of that that people are wrestling with is well, doesn't that result in some double dipping because by definition, the forgiveness portion is used on costs that would ordinarily be deductible. And I think looking at it from that standpoint, it does seem to me like it could lead to some double dipping, so I think there's speculation that hey, will the IRS come back and say yes, while the forgiveness of that loan won't be includable as income, we're not going to let you deduct those expenses.


And I don't know the answer to that, but I wish they would hurry and clarify that one way or the other because it's a fairly material item.


Micah Wallen:  All right. We'll now move to our next question in the queue.


Caller 2:  To what extent does Reg B play with regard to loan applications that for one reason or another, including that the loan sums have already been used up and the facility is no longer available, when one must decline that application?


Christian Otteson:  This is Christian. That's an issue we've been wrestling with quite a bit because obviously, the demands for the funds far outweighs the funds. We saw litigation almost right out of the box. It wasn't targeted to Reg B necessarily. In fact, it wasn't. It was against Bank of America based on issuing to customers versus non-customers. B of A prevailed on summary judgment. It's being appealed.


      Now, we have a second round of lawsuits where the plaintiff's lawyers have refined the argument, and now, it's not customer versus non but really strong good customer versus small customer.


      And I think we don't have visibility on how that's going to play out. I would say Reg B probably has more relevance in that argument. It's a tough issue because it goes back to you have a series of community banks who are making these loans. They have limited staffing and resources. And some of them, they're getting flooded with hundreds or thousands of applications, and they're struggling with how to process them without treating any of their customers or applicants unfairly.


Yet, they have to manage the resources they have, and our advice has been to take as systemic and documented approach as they can to avoid any claims of discrimination on a prohibited basis. But it's a messy process.


Jonathan Hightower:  And just to tack onto that, some of you may have seen in the CARES Act itself, in the text that talks about the Paycheck Protection Program, there's a subsection that talks about the sense of the Senate is that women owned, minority owned, and newer businesses should be given priority in the program. And no one's really talked about that or really given a view on how that's going to play out.


      I really haven't other than just to raise the issue because I don't know how it's going to play out. But I'm concerned that it's there, and I'm also concerned that the practical reality, as Christian just said, is banks were just doing all that they could to support their customers because that was the most direct path for them.


Micah Wallen:  All right. We'll now move to our next caller in the queue.


Caller 3:  Hey. Thanks very much for doing this. This is really helpful. One quick question on the borrowers and agency fees, the statute says that agency fees from a borrower perspective are supposed to be paid out of the bank -- by the bank, as opposed to by the borrower, but there has been no indication as to how the borrower is supposed to file for that. And obviously, if the proceeds are already gone, that may be something that's unattainable. But have you guys looked at that at all?


Jennifer R. McCain:  This is Jenny. I haven't -- that was just a question that came up this morning on a call too, and I would love Christian, Jonathan, ya'll's opinion on this. There's been a lot of question from the banks on these fees because it's a split when you have an agency. The bank fee gets split with the agency, as you said, and I haven't seen any guidance yet on how those fees are going to get paid and what with the agents. Have ya'll seen anything yet on that?


Christian Otteson:  Only what's been --


Jonathan Hightower:  It is --


Christian Otteson:  -- the FAQs --


Jonathan Hightower:  Yeah. Go ahead.


Christian Otteson:  -- that we currently have. In our region of the world, there are a number of incredibly large SBA aggregators, so it's something we've looked at. What we know is the borrower's not responsible for it --


Jennifer R. McCain:  Right.


Christian Otteson:  -- to the extent an agent is involved. It's the bank's responsibility. And presumably, it will end up being a split of the origination fee that the banker's fee is in connection with the origination. But we don't really know much more than that at this point.


Jennifer R. McCain:  Right.


Jonathan Hightower:  I think that --


Jennifer R. McCain:  I mean, I don't think there's anything about how the banks going to get paid that fee to split with the agent.


Christian Otteson:  Yeah.


Jonathan Hightower:  Yeah, no. It's an area that I expect litigation in based on what I've seen because I think PPA firms acting in good faith help their clients out. They believe they're going to get a split of the fee. On the other hand, the bank is sitting there saying look, I didn't agree to pay you a fee, and frankly, I don't think it's worth a fee for someone to produce 941.


      So it's an awkward spot for us to be in because these are friends on both sides in many cases, and there's some tension there. So stay tuned. 


Jennifer R. McCain:  One of the many areas where there's --


Micah Wallen:  We'll now move to our next caller in the queue.


Eileen O'Conner(sp):  Hi. This is Eileen O'Conner. Thank you so much for these presentations, for your knowledge and your time. This might be outside your area of interest, but I am having trouble reconciling 26 million new unemployment claims with the government sending out $350 million, a thread of $50 billion, to employers to keep people on the payroll.


      So two questions are can you help me reconcile those two, and number two, who's going to be responsible for confirming that the people who got these loans did in fact use them to keep people on the payroll?


Jonathan Hightower:  I'll take the first question on that one. This is Jonathan. In terms of reconciling those items, my thought -- and I think this is a great point for debate because I think it very much is debatable. My thought is there were lots of businesses that before this program came online reached a point where they could no longer continue operations. And so it just didn't make sense for them to continue, where there are others where they could. And they could maintain those operations and they could maintain payroll with the benefit of this loan. So I think you're seeing that dichotomy there to some degree.


      I wouldn't completely dismiss the fact that these funds haven't gone out as far and wide and as quickly as folks would've hoped for a variety of reasons. I think there's also the issue, just from a practical standpoint, that if you got a waitress or someone along those lines, the sheer amount of the unemployment benefits that they are expecting to receive are probably better for them than what their employer could do in many parts of the country. So in some ways, I see that as a rational decision.


Eileen O'Conner:  So you would expect that many of these people who get these loans are going to have to pay them back because they didn't use them to keep people on the payroll?


Jonathan Hightower:  Well, I think that's possible because not so much that there was an intention to do that but just people weren't able to get their folks to come back. And, of course, the forgiveness is prorated based on head count and to some degree the level at which you reduce wages. But I think what we're hearing for the most part is that folks who are getting these are continuing operations. They're maintaining payroll as best they can with the use of the loan.


      I'm sure you're well aware that there's a lot of headline talk about larger companies getting these loans and how that is frustrating to some. My perspective on that is if they're using it to maintain payroll when they otherwise wouldn’t, then that's the purpose of the program. But otherwise, it's unpopular.


Eileen O'Conner:  And then what -- thanks so much. And then what is the mechanism for confirming that people were kept on the payroll? Who's going to check that, Treasury, SBA?


Jonathan Hightower:  So that'll be the lending bank working with the borrower. There's at least a start on prescribing the documentation that the borrower will need to produce. And so the bank will take that and verify it and submit it for forgiveness.


Eileen O'Conner:  Great. Thanks so much. I appreciate it.


Jennifer R. McCain:  We're still waiting on an interim final rule for that too, I believe, on what that's going to look like and what's going to be required.


Christian Otteson:  We are, and I don't know, it's speculation on my part, but at least as part of other special government programs that have occurred, for example, during the last downturn for those programs they created OIGs. And at least in the case of TARP, the government was fairly aggressive in prosecuting abuses that occurred in connection with the program. We'll see how that plays out for this program and others that they've rolled out in the last few weeks. But it's a tool they've favored in the past to monitor abuse of the program.


C. Wallace Dewitt:  This dovetails with a question that I've had for the panelists as well about enforcement mechanisms. I'm ignorant on the point, does the SBA have civil litigating authority of its own? After the dust settles on COVID and any unintentional or even intentional malfeasance with respect to the loan program comes to light, what sort of enforcement environment are we looking at here?


Does SBA refer that to the Department of Justice? Presumably, the guidance hasn't been very clear on this point yet. But I'm curious as a general matter, what would you see six months, a year down the line? Is this going to be a litigation target rich environment?


Jonathan Hightower:  I think there's just too much money involved for it not to be.


Jennifer R. McCain:  Yeah.


Christian Otteson:  Yeah.


Jonathan Hightower:  And that's, you know, whether it's government enforcement or private litigation that we've already seen obviously, that's been our advice to clients from the get-go, which is don't think about just the fact that you want to be helpful in your community, even though that is commendable and patriotic in some cases, but you do have to protect yourself and realize that whenever there is at least the perception of free money out there, it's going to bring out the worst in people, and you have to keep your guard up.


      So, absolutely, I expect enforcement. My hope is for the banking clients that we all serve that we prepared them well and those enforcement actions will be directed more toward bad actors on the borrower side than they will be on the bank side.


Christian Otteson:  Yeah. I would tag on to that, while there is a limited safe harbor in the interim final rule that allows lenders to rely on certifications made by the borrowers, this program is not exempt from the False Claims Act, which has been -- they relied on for other government programs.


And they fired the first shot in an FAQ that was published, actually, late last night on some of these larger and public corporations asking them to rethink the certification that they made that they truly needed these funds and then allowing them to repay the loan in full by May 7. And if they do, no harm, no foul. Otherwise, they signal they will be intensely scrutinizing those recipients.


Jennifer R. McCain:  I also want to say one thing that I got a lot of questions on very early—and it's interesting, especially now, with the new money coming online—was what if we have someone applying who when we look at -- what we know about their financial situation or what we think is they aren't having a hard time with this, and this is from the very beginning. Do we need to play gatekeeper on who's getting a PPP loan? And especially given that first certification, that kind of gets the idea of the eligible borrower. And that was what Christian was just saying.


      And with this new rolling FAQ that came out, hey, if you made a certification thing, you had to have this money and it turns out you really didn't or think long and hard and make sure you really did. And by the way, if you are a public company and have access to capital markets, we don't consider that a good faith certification, and you've got a safe harbor to repay it by May 7 and no harm, no foul.


But that's the kind of thing that lenders don't have the obligation to second guess it, but it is an interesting thing because that certification has the risk of becoming just a check the box and everybody could apply and nobody was necessarily going to look twice at it because the assumption was perhaps everyone was affected and so everyone's just who could get the money first.


But that's sort of what the challenge of this whole program's been, it's rolling information. It's like you're having to make decision before you really knew what everything meant or had all the information to make the decisions with, whether you're the lender or the borrower or the advisor. And we were all, I think Jonathan and Christian would agree with, is our clients didn't have the information. They were calling us, and we didn't have the information. It's almost like you're getting information now that you wish you had two or three weeks ago.


But all of this is, as Jonathan said, it's "free money," and there never is really anything free and be careful when they say you're making a certification that you really need it. Make sure you really needed it, and I think that would be something to remember now if you're a small business or you're advising a small business that getting ready to put an application in now that there's more money coming.


Christian Otteson:  The only other thing I would add is while there is helpful language on the lender's ability to rely on certifications, there are limits to that meaning a lot of these borrowers are existing customers and if you have knowledge that something they're putting in the certification is false, well, the False Claims Act still applies. So I would proceed with caution.


Jennifer R. McCain:  That's interesting, Christian. We've been having that discussion and it's like you don't want to take on more of a duty than you're given as the lender. But it's also, you also how do you -- I would think of this as a lender thinking okay, do you need to go back before you signed and say okay, really make sure -- are you really sure that certification is still true now that we're five weeks into this? And perhaps that that's not where they were, or the contamination isn't -- the social distancing has done what it's going to do. I had the exact same thought on that.


It's something to think about that -- because even with the paycheck part of that where they gave some guidance as we went but said you can't just turn a blind eye to whatever numbers they gave you. If they don't match up with the back up, you need to go back and say let's work through the calculations again and get them right. Even though they still fault that, you can rely on what they're telling you -- the certification, if it doesn’t really work, you've still got a duty as the lender to go back and make them get it right. So it's an interesting time.


Christian Otteson:  And it looks like the madness will continue Monday morning as they just issued a press -- the SBA just issued a press release 30 seconds ago that says the portal's opening back up Monday at 8:30 Mountain Time.


Micah Wallen:  We have come to the end of our time, but we have one question in the queue. So we'll just try and fit in one more question before we close the call today.


Caller 5:  Hi, good afternoon. I have a question on the loan forgiveness and the way that it's calculated. Is the forgiveness based solely on head count and reduced wages, or will the total amount of wages be looked at? So for example, if you pay a manager more because they're working more hours and the responsibilities have increased, will that factor in as well or is it strictly head count?


Jonathan Hightower:  So there's a head count component that is, at least to my way of reading it, unavoidable even if you give hazard pay to the remaining employees. It looks to me that there will be a reduction in the available forgiveness if headcount is reduced over that applicable time.


      And, of course, that brings together questions for me that I hope will be resolved in the final guidance. What if people just aren't available to work anymore for any number of reasons that could happen that had nothing to do with being dismissed? So we'll just have to see.


Micah Wallen:  All right. Well, I'll go ahead and toss it to Wallace, or did anybody have any closing remarks before we close out today?


C. Wallace Dewitt:  Well, I would just like to thank Jenny, Jonathan, and Christian for their excellent deep and very thorough and even very much up to the seconds news conference even we got towards the end. But I really appreciate their remarks today. I think this was a terrific presentation, and hopefully, we can get a large circulation of this from the rest of the FedSoc community.


Jennifer R. McCain:  Thank you, Micah.


Christian Otteson:  Thank you.


Micah Wallen:  All right, and on behalf of The Federalist Society, I'd like to thank all of our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at Thank you all for joining us. We are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at


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